The long-running saga of so-called “single sourcing” of direct mail – which lumps together costs like print, production and post to avoid VAT – has taken yet another twist after HMRC lost a legal challenge brought by print group Paragon Communications over a mailing for its client Direct Line Insurance.
The case, which was heard at the VAT First Tribunal, follows an original HMRC ruling against DST Solutions in 2014. The company was subsequently acquired by Paragon last year.
It centred around whether the mailing – which contained insurance packs – constituted a booklet, or, as HMRC had argued, was simply a standard rated supply of services.
In the appeal, lawyers for Paragon successfully argued that the mailing was indeed a booklet, and therefore it should be zero-rated, along with the envelopes and postage, which were part of the same supply. Under current legislation, “books, booklets, brochures, pamphlets and leaflets” do not incur VAT.
The issue of single-sourcing dates back to 2012, when Ofcom let Royal Mail set its own prices for commercial bulk mail, automatically making them liable for VAT. To circumvent the changes, some charities, financial services firms and their agencies combined the print and postal costs to make them VAT exempt.
HMRC then cried foul, sparking months of top-level negotiations between the taxman, the DMA and the Charity Tax Group. Many organisations were hit with huge bills; one UK charity faced a £700,000 retrospective bill, while Cello Group had a £2.4m settlement rejected. Charity agency Bluefrog was forced into liquidation owing over £2.4m – including a VAT bill of £2.1m.
Graham Elliott, a VAT consultant with City & Cambridge, and an adviser to the Charity Tax Group, told Civil Society website that the parallels between the Paragon case and charities’ situation were“striking” and that could have major ramifications for the direct mail industry. Elliott predicted that, barring an appeal, HMRC will now have to change its guidance.
He said: “All of this has visited a great deal of difficulty on organisations and their printers, and wasted a lot of their time. If this decision is upheld then all of that will have been proven unnecessary.”
The DMA has vowed to investigate the case, with a view to issuing new guidance.
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